Demographics and GDP: 2% is the new 4%
Three years ago, I wrote Demographics and GDP: 2% is the new 4%. In that post I pointed out that due to demographics, slower GDP growth should have been expected over the last decade (contrary to political nonsense).
Yesterday, Greg Ip at the WSJ noted: Mulvaney: "People thought we were crazy" to forecast 2.3% 2017 growth. "We blew that out of the water." (Referring to John Mulvaney, Director of the Office of Management and Budget).
What was real GDP growth in 2017? 2.3% according to the BEA. Too funny. (Maybe he meant Q4 over Q4, but that was only 2.5% - not exactly blown "out of the water".
This give me an excuse to update my graphs from my post three years ago. Overall, we should have been expecting slower growth this decade due to demographics - even without the housing bubble-bust and financial crisis.
One simple way to look at the change in GDP is as the change in the labor force, times the change in productivity. If the labor force is growing quickly, GDP will be higher with the same gains in productivity. And the opposite is true.
So here is a graph of the year-over-year change in the labor force since 1950 (data from the BLS).
Click on graph for larger image
The data is noisy - because of changes in population controls and the business cycle - but the pattern is clear as indicated by the dashed red trend line. The labor force has been growing slowly after declining for some time.
We could also look at just the prime working age population - I've pointed out before the that prime working age population has started growing again.
Now here is a look at GDP for the same period.
The GDP data (year-over-year quarterly) is also noisy, and the dashed blue line shows the trend.
GDP was high in the early 50s - and early-to-mid 60s because of government spending (Korean and Vietnam wars). As in example, in 1951, national defense added added 6.5 percentage points to GDP. Of course we don't want another war ...
Now lets put the two graphs together.
It isn't a surprise. Other than the early period with a boost from military government spending, the growth in GDP has been tracking the growth in the labor force pretty well. The difference in growth between the dashed blue and red lines is due to gains in productivity.
The good news is that the working age population will be growing faster going forward. The bad news is the political hacks will continue to ignore demographics.
However, due to demographics, 2% GDP growth is the new 4%. (Note: with improving demographics, maybe 2.5% is the new 4% now)